`Rogue Executive' Led Xerox Into Fuji Deal, Investor Claims

(Bloomberg) -- Xerox Corp. was a company racked by infighting, rogue decision-making and dishonesty as it raced to sell itself to Japanese rival Fujifilm Holding Inc., according to claims detailed in new court filings.

The amended complaint, filed Thursday in state court in Manhattan by investor Darwin Deason, contains at least portions of correspondence, some previously redacted, among Xerox board members, executives, their counterparts at Fuji, and their advisers. Taken collectively, they lay out a breakdown of corporate governance norms.

At the heart of Deason’s complaint is the accusation that Xerox Chief Executive Officer Jeffery Jacobson acted without authorization to strike a deal with Fujifilm that preserved his job at the expense of shareholder value; an allegation Xerox has labeled “highly disingenuous.” Xerox has asked a judge to deny Deason’s request for a court order blocking the merger.

‘Sleepless Nights’

The revised complaint includes text from what it says is a Dec. 7, 2017, letter written by Xerox director Cheryl Krongard to the company’s chairman Robert Keegan, titled “4 sleepless nights”. In that letter, Krongard called Jacobson a “rogue executive” who disobeyed the board to secretly negotiate a deal with Fujifilm.

In the letter -- purportedly sent less than two months before Xerox agreed to the deal -- Krongard also writes: “This board exhausted every ounce of patience and coaching to make our current CEO a success. We then decided, unanimously, for a variety of reasons, he was not the leader we need.” Krongard adds that the company had identified a CEO replacement who, she says, Keegan had said was “head and shoulders better than Jeff”.

The letter continues: “Jeff was told by you, as directed and supported by the board, that the board was disappointed by his performance and would likely look at outside talent. Additionally, you told him in no uncertain terms, that he was to discontinue any and all conversations with FX and F regarding Juice. He blatantly violated a clear directive”.

Project Juice was the code name given to deal discussions, while F and FX refer to Fujifilm and the Fuji-Xerox joint venture, respectively.

‘Rogue Executive’

Later on, Krongard writes, “Jeff has put us, and mostly you, in a horrible situation. He is asking us to lie! In my most heartfelt and emotional outreach to you, I implore you not to let this happen! Were it I, I would contact Shigetaka Komori [Fujifilm CEO] personally and bow as low as possible (figuratively) and tell him of our rogue executive’s behavior and beg his forgiveness. Simultaneously, we need to get new leadership ASAP.”

Jacobson kept his job and, according to the complaint, Krongard didn’t receive a response to her letter. Requests for comment from Jacobson and Krongard, a former Apollo Management LP senior partner appointed to Xerox’s board in December 2016, were referred back to Xerox.

“As is absolutely clear from the record, Jeff Jacobson has always conducted himself with the utmost integrity as CEO and in negotiations with Fujifilm,” according to a statement from Xerox’s board and provided by a spokesman. “At no point did he exceed the authority granted to him by the board’s chairman or the full board. The allegations by Mr. Deason to the contrary are part of his effort to distort the facts.”

“Mr. Deason and his lawyers are well aware that Ms. Krongard in her sworn testimony stated that, after sending Keegan a letter expressing concern about Jacobson’s conduct, she became aware that Jacobson had in fact previously received Mr. Keegan’s express permission to negotiate with FujiFilm,” the statement said.

Second Guessing

In a court filing Thursday, Xerox asked a judge to throw out Deason’s claims against it, Jacobson and its directors. New York law doesn’t allow Deason to second-guess the board’s business judgment, Xerox said in the filing.

“It is crystal clear that even if Jacobson (the only inside director on the board) were conflicted -- and he was not -- any such conflict did not infect the decision of the nine outside directors who approved the transaction,” Xerox said in the filing.

“Deason’s grab bag of other arguments amounts to no more than Monday morning quarterbacking,” it added.

‘Short Stick’

Deason said Thursday in a statement that the defendants are continuing to hide “incredibly harmful facts” contradicting public statements.

“As they say in Texas, Xerox and Fuji are ‘swinging a short stick hard’ in this case,” he said. “A whitewash defense won’t work here given the hundreds of documents, text messages and emails from the directors, Mr. Jacobson, and Fuji.”

Krongard’s letter is among scores of text messages, emails and handwritten communications said to be exchanged in the months leading up to the Xerox-Fujifilm deal that are referred to in the revised complaint. In some, activist investor Carl Icahn, who has joined forces with Deason to block the merger and seek changes at Xerox, is called “crazy” by Jacobson and a “mutual enemy”. In others, Fujifilm’s Komori is referred to as a “warrior” by Jacobson and as having “terribly scolded” one of his subordinates.

A Fujifilm spokeswoman referred to a previous statement in which she said that Deason’s amended complaint “reflects the biased, arbitrary, and inaccurate view of Mr. Deason’s attorneys.” She said the Xerox agreement was “negotiated at arms-length between independent parties with the advice of third party professionals.”

A representative for Icahn didn’t immediately respond to requests for comment.

Deal Terms

Under the terms of the deal, announced in January, Xerox, which has a market value of $7.7 billion, will first merge with a joint venture that the company operates with Fujifilm in Asia. Current Xerox shareholders will receive a cash dividend of $9.80 per share. Tokyo-based Fujifilm will ultimately end up owning 50.1 percent of the combined entity, which expands the joint venture to encompass all of Xerox’s operations.

Months earlier, as the terms of the deal were outlined, executives at Xerox shared concerns. The new complaint lays out how, in a July 16, 2017 email, Bill Osbourn, Xerox’s chief financial officer, wrote to Bob Brody, the company’s head of competitiveness and performance optimization.

“They clearly didn’t understand the economics of the transaction. Will be interesting to see how the Board responds,” Osbourn writes, without explaining who “they” are.

Two days later, Brody emailed Jacobson directly to say: “For what it’s worth I think this 51% plan doesn’t work and the assumptions and math are shaky”. It’s not clear from the complaint what Jacobson’s response was, if any.

Full Takeover

Krongard had also raised earlier concerns. In a Dec. 4 email to three fellow directors, according to the complaint, she said she could “argue strongly that we are not acting in our shareholders’ best interest in this transaction. No premium, minority position, no governance and a base case from the LRP [Long Range Plan] which comprises fictional numbers”.

Perhaps the most stunning accusation in the complaint concerns an email Jacobson received from Xerox employee Tetsuya Shiokawa on July 26, 2017, in which Shiokawa told the Xerox boss that Fuji’s preferred deal structure was a full takeover of the U.S. company, though Xerox’s share price at the time was a “little too high.” He outlined a scenario in which Fuji would team up with a private equity firm to acquire all of Xerox.

Deason alleges in the complaint, which doesn’t reference a response from Jacobson, that Jacobson failed to communicate that conversation to Xerox’s board or the company’s financial advisers at Centerview.

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